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January 16, 2014

Tax History: Tax Reform Has Leaders, but No Followers

Joseph J. Thorndike

Lobbyists are professional optimists, especially when it comes to tax reform. They have a vested interest in promoting the idea that reform might happen, even when everyone knows it won't. (And yes, I recognize that tax policy writers also have a vested interest in keeping hope alive, if only to have something to be cynical about.)

Hence the comments of RATE Coalition Co-chair James Pinkerton, who strained the limits of credibility earlier this month when he suggested to MarketWatch that reform was just around the corner. "Unlike a lot of issues, this is something where the stars are sort of aligning already," he said.

The key to imminent success is all the bipartisan enthusiasm for reform, Pinkerton said. Both Democratic and Republican leaders have signaled their commitment to it, as has President Obama, he said. Electoral self-interest will eventually produce compromise. "It helps any incumbent to be able to say, 'Look, I know things are hard, I know you're hurting, and I've done something to help you,'" Pinkerton pointed out.

That's true, as far as it goes. But that's not very far. Politicians can claim to be helping whenever they try to do something. Actually doing it is a secondary concern, and perhaps even undesirable because real reform involves hard choices while notional reform is all aspirations: efficiency, simplicity, lower rates, etc.

Reform TV

The feel-good politics of reform were on display last week when House Ways and Means Committee Chair Dave Camp, R-Mich., released a new video. (Apparently Congress doesn't face the same restrictions on video production that will soon apply to the IRS.) The headline statistic touted in the video is a meaningless one: a 25 percent reduction in the "size of the tax code." Whatever that means.

More generally, the video is exactly what you would expect: a collection of empty platitudes, leavened with some Republican talking points, designed to gin up popular interest in tax reform. There is precisely zero actual content.

Camp delivered his video with still more platitudes: "Tax reform done right can not only make the tax code simpler and fairer, it can create a climate for real investment and growth and promote a meaningful policy discussion about an economic agenda to move America forward."

It feels a bit churlish to chastise Camp for vapid videography when, more than any other member of Congress, he has tried to do the real work of tax reform. He has been a true leader, up to a point.

But Camp has been unable to actually produce a bill. Presumably, it's not for lack of trying. Rather, he has struggled with the new reality of tax reform politics: The process doesn't need leaders but more followers.

Fading Hopes

Tax reform has been declared dead any number of times over the last year, and the obituaries have really piled up since Senate Finance Committee Chair Max Baucus, D-Mont., began packing his bags for Beijing. But reform was dead long before the White House leaked plans for the Baucus nomination.

Camp's failure to get a bill out of his committee was especially significant. According to most reports, he agreed to slip the deadline to avoid stealing the policy spotlight from the GOP attack on Obamacare. But there's no indication that he had the votes for a bill anyway. Certainly not for a bipartisan one, and probably not for a party-line GOP bill.

The problem ultimately is not Camp, or Baucus, or even Obama. The problem is that tax reform does not enjoy any real support from rank-and-file members of either party. That's what makes today different from the tax reform effort of the mid-1980s.

That doesn't stop professional optimists from holding out 1986 as a beacon of hope. In an op-ed for The Hill, written with his RATE Coalition co-chair, Elaine Kamarck, Pinkerton offered a concise summary of this legislative morality tale:

The country has been here before. Twenty-seven years ago our nation's leaders understood that in order to compete in a changing and globalizing economy America needed to reform its tax code. A Republican president and a Democratic Congress came together to pass legislation that wasn't ideologically perfect for either party, but was a successful compromise that put America's economy first and helped set the stage for the economic success of the 1990's. The 1986 Tax Reform Act suffered its own setbacks; critics declared it dead many times. However, in the end both parties came together, late in the 99th Congress, to pass legislation that helped the country's economy grow and transform.

In broad strokes, there's nothing wrong with this capsule history. But it's irrelevant to the situation we confront today. The past, as historians are fond of saying, is a foreign country -- it's strange and often hard to understand. But most of all, it's different than the present. And when it comes to tax reform, 2014 bears almost no resemblance to 1986.

The key difference is not leadership. In many respects, Camp and Baucus have provided even better leadership than their 1986 counterparts, former Rep. Dan Rostenkowski and former Sen. Bob Packwood. And while Obama is no Ronald Reagan, even his lack of commitment is not the real obstacle. Indeed, it's a symptom of the more fundamental hurdle: party polarization.

Bipartisanship is the linchpin of tax reform, at least in the 1986 style. It doesn't have to exist at the outset, but the possibility of its eventual appearance has to be plausible. As lawmakers face the prospect of taking hard votes, they need some assurance that their colleagues will climb out on the limb with them -- including some members of the other party.

Today, there is no sense that either party will come to the aid of the other, even in the service of shared aspirations. And more to the point, the specific goals of tax reform -- its very definition, in fact -- aren't shared. In 1986 the tax reform trade-off of base broadening for rate reduction enjoyed real, if not always enthusiastic, bipartisan support. That's no longer true. Similarly, the foundational commitment to revenue neutrality has long since disappeared.

Today, the parties are deeply divided, on tax issues as well as pretty much everything else. In their 2006 book, Polarized America: The Dance of Ideology and Unequal Riches, Nolan McCarty, Keith T. Poole, and Howard Rosenthal argued that the gulf between Democrats and Republicans was large and growing. Indeed, it was reaching levels not seen since the late 19th century. That sort of polarization makes any sort of real compromise on tax reform (or any other issue that involves hard choices) extremely difficult.

That's not to say that extreme polarization is unusual. The real aberration is the 50-year period of relative comity that stretched from roughly the 1930s into the 1980s. The 1986 tax reform came at the tail end of this "fifty-year blurring of partisan divisions." Since then, polarization has gotten much worse -- as have the prospects for a repeat of the tax reform on the 1986 model.

Today, we still have party leaders interested in bipartisan compromise. But the leaders of 2014 are far weaker than those of 1986 (who were themselves weaker than their predecessors during the great polarization dip of the mid-20th century). Rank-and-file members of both parties enjoy much more freedom to chart their own course than they once did, as evidenced by the internal struggle currently afflicting the Republican caucus.

Party Polarization, 1879-2013Distance Between the Parties, First Dimension

Source: Polarized America: The Dance of Ideology and Unequal Riches/Voteview.com

Earlier this month, Ways and Means member Aaron Schock, R-Ill., told an audience that Camp was having trouble mustering GOP support for the particulars of tax reform. "When we went through the rough drafts, there was some screaming and gnashing of teeth," Schock said at a Bloomberg Government breakfast. Camp later minimized the comments, suggesting that Schock was "joking." But the very fact that Camp has been so secretive about his legislative drafts is illuminating.

And it's not all about Republicans, of course. Democrats, too, seem to have plenty of enthusiasm for the idea of tax reform (maybe they need their own video making this point), but not much interest in particulars. Baucus has tried to put some meat on the bones, but again, that's an act of leadership in a Congress that actually needs more followership. The taxwriting glitterati have shown themselves at least modestly willing to take some risks. But so far, rank-and-file party members haven't shown much inclination to follow their leaders out of the trenches.

In a few weeks, we'll have a new leader heading up Finance. And soon enough, Camp will be replaced by someone new at Ways and Means -- maybe even the reform-hungry, wonkishly inclined Rep. Paul Ryan, R-Wis. But I wouldn't vest much hope in the transformative effect of new leadership. Indeed, I suspect that the new committee chairs may be less willing than their immediate predecessors to take the risk of leading tax reform. Camp and Baucus have given the cause a genuine, serious effort -- and they have nothing to show for it.

If I were an incoming chair looking to make my legislative mark, I would not choose tax reform as my leadership project. Not in this partisan climate. And not with these followers.